Tuesday, February 17, 2004

Strategic Reserve Role in Prices
Over the weekend, the Financial Times carried a story highlighting criticism of the Administration by two US Senators, Levin of Michigan and Collins of Maine, for adding to the Strategic Petroleum Reserve (SPR) when oil prices are high. The senators cited various estimates of the cost of this policy to consumers, from $4-8 dollars per barrel (or 9.5-19 cents/gallon of gasoline).

The DOE's statistical service, the Energy Information Agency, indicates in its weekly reports that about 100,000 barrels per day went into the SPR last year. If the goals cited in various reports are correct, the rate would increase to about 150,000 barrels per day for 2004. To put that into perspective, US refineries processed 15.3 million barrels/day (MBD) last year, of which only 37% came from domestic production.

So the two senators and the economists backing their arguments assert that a volume amounting to less than 1% of total US oil supply, or only 0.2% of total global supply is sufficient to drive up global crude prices by more than 10%.

By comparison, during the national strike in Venezuela, nearly 3 million barrels/day, 4% of global supply and 20 times as much as oil as is being put into the SPR, were taken off the market for almost 3 months. By the end of the strike, prices for West Texas Intermediate crude oil had risen by $10/barrel, in a period that coincided with the runup to the Iraq war. A month later, prices were back at the pre-strike level, even though Venezuelan production took many months to restore fully.

Oil prices are volatile and nearly impossible to predict in the best of times, with many complex factors interacting chaotically. But it seems a safe bet that there is more politics than economics in the argument of Senators Levin and Collins that continuing to fill the SPR is seriously pinching consumers at the gas pump.

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